Japan's economy remained mired in recession late last year, shrinking 0.4 percent in annualised terms for the third straight quarter of contraction, following weak demand both at home and overseas.

Yoshihide Suga, chief government spokesperson, acknowledged the lingering weakness in the economy, while voicing optimism over a global recovery.

"We also expect our nation's economy to make a gradual recovery," he said.

Many analysts had forecast the economy would emerge from recession in the final quarter of 2012 as the Japanese yen weakened against other major currencies, giving a boost to Japanese export manufacturers.

"Over all the rebound in consumer confidence is consistent with other surveys showing that business conditions picked up strongly at the start of the year."

- Julian Jessop, Capital Economics economist

Prime Minister Shinzo Abe took office in late December with a platform of aggressive spending and monetary stimulus to help get growth back on track.

He has lobbied the central bank to set an inflation target of 2 percent, aimed at breaking Japan out of its long bout of deflation, or falling prices, that he says are inhibiting corporate investment and growth.

The Bank of Japan left monetary policy unchanged following a two-day meeting that ended on Thursday, noting in a statement that "Japan's economy appears to have stopped weakening."

Government spending, housing investment and private consumption appear to be picking up, it said.

For the time being, inflation is likely to remain flat since prices are unlikely to increase following last year's jumps in costs for energy and consumer durable goods, the central bank said.

Masaaki Shirakawa, the bank's governor, is due to step down on March 19 and Abe is expected to appoint as his successor an expert who favours the prime minister's more activist approach to monetary policy.

Consumer confidence

Despite the dismal data for last year, many in Japan expect at least a temporary bump to growth from high government spending on public works and other programmes.

An index measuring consumer confidence, released earlier this week, jumped to its highest level since 2007, the biggest ever increase in a single month.

"Overall the rebound in consumer confidence is consistent with other surveys showing that business conditions picked up strongly at the start of the year," Julian Jessop, an economist at Capital Economics in London, said.

"Whether this optimism proves to be justified is another matter, but at least sentiment is clearly improving."

Earlier this week, Abe appealed to businesses to raise wages to help boost domestic demand and carry on momentum from government spending.

Data for the fourth quarter showed that private consumption, which accounts for more than two-thirds of economic activity, rose 0.4 percent in the fourth quarter, while housing investment climbed 3.5 percent.

Japan's growth has stagnated since its "bubble economy" burst in the early 1990s, despite massive investments in public works that have pushed its national debt to the highest level among major industrial nations, at more than twice the size of the economy.

The Japanese yen, whose value was long pushed higher against other currencies due to its status as a "safe haven" for investors, has weakened by about 20 percent since October.

Though the government has not directly intervened to bring the yen's value lower, its policies have convinced many in the markets that more money will be created, undermining the currency's value.

This has raised concern over the potential for competitive devaluations of other currencies that could undermine growth.